It’s easily one of the most remarkable performances in the market right now. Cineplex operator Cinemark (CNK) gained over 2% on Monday while the rest of the market seemingly went into freefall. Even more impressively, in the past five sessions, CNK stock swung up almost 12%. In sharp contrast, the benchmark S&P 500 index during the same frame slipped more than 5%.
Driving this impressive performance is the company’s latest earnings report for the second quarter. According to AP, Cinemark posted a profit of $45.8 million, translating to earnings per share of 32 cents. This figure beat the consensus estimate of only 7 cents by a wide margin. Just as surprisingly, the movie theater owner generated revenue of $734.2 million, jumping ahead of the Street’s estimate of $693.2 million.
Of course, the pronounced earnings beat clashes with an emerging narrative that the box office – as The Economist pointed out earlier this year – may be dying. Now, the claim of a permanent end to movie theaters is a contentious one. Nevertheless, it’s unavoidable that investors and analysts will think this way. After all, on-demand streaming services have become ubiquitous.
Further, advancing technologies and economies of scale have contributed to prior skepticism of CNK stock and similar entities. Nowadays, it’s easy to find 70-inch television sets for well under $1,000. That was simply unimaginable not too long ago.
So, it’s understandable that investors may have doubts about the forward sustainability of the current rally in CNK stock. Nevertheless, it’s important to consider all the facts before making your decision.
Options Traders Have Their Say on CNK Stock
Amid the carnage of Monday’s steep selloff, the resilience of CNK stock naturally attracted attention. Following the ringing of the closing bell, the equity represented one of the highlights in Barchart’s screener for unusual stock options volume. This data interface identifies aberrant activity relative to established norms, potentially spotlighting the ideas the smart money may be most interested in.
In total, options volume for CNK stock reached 17,365 contracts against an open interest reading of 127,654. This figure represented a 427.01% leap from the trailing-month volume metric. Further, call volume clocked in at 16,897 contracts, far exceeding the put volume of 468. With a put/call volume ratio of 0.03, the dynamic appears to favor the bulls.
It’s true that traders holding call options enjoy the right (but not the obligation) to acquire the underlying security at the listed strike price. However, it’s also important to understand how the biggest investors are positioned regarding their derivative market transaction. Basically, every option that is bought must be sold.
To better elucidate the dynamic behind CNK stock, investors should consider perusing Barchart’s options flow screener, which focuses exclusively on big block transactions likely placed by institutional or professional investors. Here, we find that the net trade sentiment of Cinemark’s derivatives sit at $-2.7 million, thus favoring the bears.
Interestingly, most of the pessimistic sentiment trades are sold calls at various expiration dates and ranging from a strike price of $17.50 to $27. In other words, if CNK stock falls below these strike prices, the call seller (or writer) of the associated options will be able to collect maximum premiums.
That seems like a decisively bearish wager. However, there’s one wrinkle to consider.
Short Squeeze to the Rescue?
According to Fintel, CNK stock features a short interest of 27.07% of its float. In addition, the short interest ratio lands at 6.42 days to cover. That’s the number of trading sessions necessary for the bears to fully unwind their short exposure based on average trading volume.
Intriguingly, the investment resource reports that at a leading brokerage (this is not an all-inclusive figure, to be clear), the number of shares available to short is only 300,000. Further, Fintel’s proprietary Short Squeeze Score gives CNK stock a rating of 75.16 out of 100 points. This statistic indicates a higher-than-average probability that a short squeeze may materialize.
Obviously, for bearish traders, short squeezes are dangerous. In order to initiate a short position, one must first borrow the underlying security, then sell the holdings in the open market. The idea is to pick those shares back up once cheapened and thereby profit from the difference between the sale price and the buy-back price.
However, a contractual obligation to return the shares back to the broker exists. If the target security rises in value, short traders would be forced to buy back borrowed positions at a loss. If that happens to CNK stock, the profits could be intense.
Nobody gave Cinemark a chance. Now, the bulls have a chance for some payback.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
